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Weekly Technical Analysis

By: TheWaveTrading | Sunday, January 27, 2013

This weekend I will begin the Technical update reviewing one of the two Ending
Diagonal options that I have discussed in my last SPX Update of the Long-Term
Count on January 6.

Before analysing in detail this option just as a reminder my overall scenario
remains unchanged: "From the 2000 Top price is unfolding a Double Zig Zag,
therefore now price is involved in completing the wave (X). Once the wave
(X) is in place price will begin to unfold the second Zig Zag down towards
the 2009 lows. Therefore I dismiss any bullish scenario that implies a major
break out above the 2000 top; instead I maintain the assumption that considers
a move back down towards the 2009 lows once the wave (X) is complete."

Since a wave (X) is by definition a corrective countertrend move in my opinion
it is reasonable to consider that from the November 2008 low price is unfolding
a Double Zig Zag.

In the monthly chart below I show the overall count from the March 2000 top.
In this case I am assuming that from the June 2012 low price has began an
Ending Diagonal that will complete the second Zig Zag of the wave (X) establishing
a Major Top.

I also highlight the eom print of August 2000 = 1517.68 as a potential magnet
for the current wave (III) of the Ending Diagonal project.

Technically this is a valid option since the internal structure of the two
up legs from the June 2012 are both corrective.

Next in the weekly chart below I zoom in the time frame where price is expect
to unfold the Ending Diagonal "project". As we can see from the June lows
to the September peak price has unfolded the wave (I), in the following pullback
price established at the November low the wave (II), and the current up leg
is the assumed wave (III) of the Ending Diagonal.

Wave (IV) < Wave (II) and must overlap below the peak of the wave
(I), therefore the wave (IV) will have to break through the September
peak at 1474.51

Wave (V) < Wave (III)

Regarding the internal structure, the waves of an ED have to subdivide into
a Zig Zag or a combination (Double Zig Zag).

In my opinion as I have discussed in the daily updates the assumed current
wave (III) is unfolding a Double Zig Zag therefore price should still be involved
in finishing the wave (A) of the second Zig Zag.

Weekly momentum is strengthening the scenario of this Ending Diagonal option:

RSI: There is negative divergence vs the September peak, but no divergence
can be seen of the move from the November low, hence the current up
leg is not expected to establish a major top.

Stochastic is overbought but in order to expect a sizeable pullback
it has to issue a bearish signal cross and lose the 80 line.

As long as the MACD's bullish cross is not reversed price is not expected
to embark in a major correction / trend reversal.

Below I show the potential "map" of the wave (III) and (IV) of the ED. If
this scenario is correct then price should soon begin a wave (B) pullback
that could revisit the September 14 high, from where it should unfold the
last wave (C) of (III), hence a sizeable pullback should occur once the wave
(III) is in place.

I modify the two potential target boxes mentioned last Thursday for the assumed
wave (B) pullback:

Moderate correction: 1474 - 1466

Larger correction: 1464 - 1451

In addition to the potential not complete EW count I consider that the up
leg off the December 31 low has more business to the upside because there
is no negative divergence in the daily RSI.

Regarding the short-term price action despite the fact that there is still
no clear ending pattern in sight for the up leg from the December 31 low we
do have increasing warnings that a pullback is due:

NDX: Last week's price action suggests that it has already begun a technical
pullback:

-Wednesday's Spinning Top.

-Thursday's gap down = Island Reversal

If a short-term top is in place then next week price has to establish a lower
high (Thursday's gap down must not be closed). If this is the case then Bears
should take the opportunity to ride a move towards the range 2672.30 (200dma)
- 2660.93 (January 2 huge gap fill) where I expect price to complete a shallow
correction.

Likewise SPX, the overall count off the November 16 low should be a Double
Zig Zag in which case price has began the wave (B) pullback of the second
Zig Zag. (Blue count)

If the gap at 2660.93 is closed then instead of a Double Zig Zag the overall
count would be a Zig Zag and the assumed wave (B) pullback should bottom no
lower than the December 31 low. (Black count)

I consider this option less likely.

Either way, in my opinion, the EWP is suggesting that there is still a pending
wave (C) up.

Regarding TWT Swing Picks on Friday I closed the UGL long position with a
loss as GLD closed below the 200 dma.

So it has not been a good start for the inaugural "virtual" trading initiative.
Next week I will try to be on the look out for a long set up with SPXU and
or with QID (since NDX has most likely already began a correction). Today
I will also analyse trading opportunities in other leveraged short etf.

My goal is to establish the most likely path that the price of a particular
asset will undertake and profit through ETF instruments both on the long and
short side and mainly with leveraged ones (2 x & 3 x).

Therefore the main purpose of TWT will be to establish investment strategies
regardless if the market is in an up trend or in a down trend, leveraging
the chosen scenario while managing the risk by establishing protective stop
losses.

Hence I will always define the risk, I will try to let winners run the wave
and I will cut the losses if my strategy is wrong.

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